18.7: Ratio Summary

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Type	Ratio	Formula	Significance
Liquidity Ratios
Working Capital		Current Assets – Current Liabilities	Amount of current assets left over after paying liabilities
Current ratio		Current Assets Current Liabilities	Test of debt-paying ability – how much do we have available for every $1 of liabilities.
Acid-test (quick) Ratio		Quick Assets (Cash + Marketable Securities + net receivables) Current Liabilities	Test of immediate debt-paying ability – how much cash do we have available immediately to pay debt
Cash flow liquidity ratio		(Cash + Marketable securities + Cash flow from operating activities) Current Liabilities	Test of short-term, debt paying ability
Accounts Receivable Turnover		Net credit sales (or net sales) Average Accounts Receivable **Avg Accounts Receivable is calculated as (beg. or last year’s accounts receivable + current year end Accounts receivable) / 2	Test of quality of accounts receivable – how many times have we collected avg accts receivable
Days Sales Uncollected		Accts Receivable, Net x 365 days Net Sales **Accts Receivable, Net means Accounts Receivable – Allowance for doubtful or uncollectible accounts.	How many days it takes to collect on accounts receivable
Inventory Turnover		Cost of Goods Sold Average Inventory **Avg Inventory is calculated as (beg. or last year’s inventory + current year end inventory) / 2	Test of management efficiency – how many times we have sold avg. inventory
Days Sales in Inventory		Ending Inventory x 365 days Cost of Goods Sold	How many days it takes to sell inventory
Total Asset Turnover		Net Sales Average Total Assets **Avg Total Assets is calculated as (beg. or last year’s total assets + current year end total assets) / 2	How many times we have been able to sell the amount equal to avg total assets. Tests whether the volume of business is adequate.
Equity (or Solvency) Ratios
Debt Ratio		Total Liabilities Total Assets	How much we owe in liabilities for every $1 in assets.
Equity (or Stockholder’s Equity) Ratio		Total Equity Total Assets	How much equity we have for every $1 in assets.
Debt to Equity Ratio		Total Liabilities Total Equity	How much we owe in liabilities for every $1 of equity.
Stockholder’s Equity to Debt Ratio		Total Equity Total Liabilities	How much equity we have to cover $1 in liabilities.
Profitability Ratios
Profit Margin Ratio		Net Income Net Sales	How much NET income we generate from every dollar of sales.
Gross Margin Ratio		Net sales – Cost of goods sold Net Sales	How much gross profit is earned on every dollar of sales (also known as markup)
Return on total assets		Net Income Average Total Assets **Avg Total Assets is calculated as (beg. or last year’s total assets + current year end total assets) / 2	How many times we have earned back average total assets from net income.
Return on common stockholder’s equity		Net Income – Preferred dividends Average common stockholder’s equity	How much net income was generated from every dollar of common stock invested.
Basic Earnings per Share (EPS)		Net Income – Preferred Dividends Weighted Avg common shares outstanding	How much net income generate on every share of common stock
Market Prospects
Price-earnings ratio		Market price per common share Earnings per share	How much the market price is for every dollar of earnings per share
Dividend yield		Annual cash dividends per share Market price per share	How much dividends you receive based on every dollar of market price per share.

Click ratio summary for a printable copy.

Accounting Principles: A Business Perspective. Authored by: James Don Edwards, University of Georgia & Roger H. Hermanson, Georgia State University. Provided by: Endeavour International Corporation. Project: The Global Text Projectt. License: CC BY: Attribution

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